Feb
28
Fannie Mae Posts $3.6 Billion Loss
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Fannie, the largest buyer and backer of U.S. home loans, said Wednesday it lost nearly $3.6 billion in the fourth quarter of 2007 amid mounting home-loan delinquencies and soured bets on interest rates.
WASHINGTON – Fannie Mae and Freddie Mac will be allowed to expand their roles in the turbulent mortgage market even as worsening conditions in the housing sector punish the two companies.
Fannie, the largest buyer and backer of U.S. home loans, said Wednesday it lost nearly $3.6 billion in the fourth quarter of 2007 amid mounting home-loan delinquencies and soured bets on interest rates. Freddie is expected Thursday to report a $1.5 billion fourth-quarter loss, according to Wall Street estimates.
Under a previous agreement with federal regulators, the timely filing of Fannie’s and Freddie’s financial results triggers the removal of an investment-portfolio cap placed in the aftermath of multibillion-dollar accounting scandals at the government-sponsored companies.
Analysts said the impact will be limited, however, because of the large cash cushion Fannie and No. 2 mortgage financer Freddie must maintain as a reserve against risk. Tightness in credit markets makes it expensive for Fannie and Freddie to marshal additi/.onal funds.
Fannie, which gave a pessimistic housing outlook for 2008, said close to 90 percent of its fourth-quarter losses stemmed from investments it made based on the assumption that falling interest rates would cause mortgage values to appreciate.
Shares of Washington-based Fannie, the largest U.S. buyer and backer of home loans, swung widely after the report was released, initially falling by more than 5 percent and later rising by roughly 15 percent. Shares of Fannie climbed 30 cents, or 1.1 percent, to close at $27.27. Shares of Freddie fell 12 cents to $25.09.
Fannie’s $3.56 billion quarterly loss more than doubled from a loss of $1.4 billion in the third quarter of 2007 and contrasts with a profit of $604 million in the same period a year earlier. The loss was equivalent to $3.80 a share, far steeper than the $1.24-per-share loss forecast by analysts surveyed by Thomson Financial.
“The housing conditions are serious and they’ve gotten worse,” the company’s president and CEO, Daniel Mudd, said in a conference call with analysts. “This is an extraordinarily uncertain market.”
Mudd called 2008 “another tough year.”
If current market conditions continue or worsen, the company said, it may have to raise new capital by selling off mortgage investments, mounting another sale of special stock or further reducing — or even eliminating — its dividend.
A silver lining for Fannie, executives said, will be the anticipated wave of refinancing activity as borrowers with adjustable loans resetting at higher rates secure more affordable, fixed-rate mortgages. Plans put in place by the Bush administration and Congress are intended to prime the mortgage-market pump, though the effects so far have been limited.
An additional spark to the mortgage market could come following Wednesday’s announcement by the Office of Federal Housing Enterprise Oversight, which said that on March 1 it will remove the combined $1.5 trillion cap on Fannie’s and Freddie’s mortgage holdings.
However, a bigger constraint on the companies’ ability to buy mortgages has been a government mandate that requires Fannie and Freddie to keep 30 percent more capital in reserve than the minimum legal requirement, analysts said. That restriction, which the government is considering decreasing gradually, means Fannie and Freddie would have to boost their reserves by billions more to be able to make more loan purchases.
“The question becomes do they have the capital to maintain a larger portfolio?” said Bert Ely, a banking consultant based in Alexandria, Va.
Because of the required 30 percent cushion, the companies have been forced to sell special stock to raise a total $13 billion in capital in 2007 and have cut dividends.
“Our No. 1 priority is capital,” Mudd said in the conference call.
Sen. Charles Schumer, D-N.Y. called the decision to eliminate the portfolio limits “long overdue” and also said the capital requirement should be lifted immediately.
The government “clearly is responding to pressure to open up Fannie and Freddie’s ability to buy loans,” said Bob Walters, chief economist with Quicken Loans, a mortgage company based in Livonia, Mich.
Fannie attributed $3.2 billion of its losses to the revaluing of complex financial instruments it uses to hedge against swings in interest rates.
Through these investments, known as “interest rate swaps,” Fannie tries to hedge against the risks of rising or falling interest rates. The mortgages on the company’s books tend to rise in value when interest rates drop, and vice versa. But that bet hasn’t worked out of late, as interest rates fell in the fourth quarter and the value of mortgages held on the company’s books has fallen as well.
Fannie said Wednesday it expects U.S. home prices to fall by 5 percent to 7 percent this year. It earlier forecast a decline of 4 percent to 5 percent. Fannie Mae said it expects to lose money this year on 11 to 15 of every 1,000 mortgages held on its $2.4 trillion book, up from its earlier expectation of eight to 10 and a steep increase from four to six in 2007.
Feb
26
Home Price Plunge Accelerates
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2007 year-end results are in and the news is bad: Major housing markets were down even more than anticipated.
NEW YORK (CNNMoney.com) — The decline in residential real estate accelerated though the end of 2007, and home prices in 20 key markets plunged 9.1% for the year, according to a survey released Tuesday.
The S&P Case/Shiller Home Price index showed its largest annual drop in its 20-year history. By comparison, during the 1990-91 recession, home prices fell 2.8%.
Prices dropped faster throughout 2007 with the index recording a 9.1% year-over-year drop in December.
“We reached a somber year-end for the housing market in 2007,” said Robert Shiller, Chief Economist at MacroMarkets LLC and co-founder of the index, in a statement. “Home prices across the nation and in most metro areas are significantly lower than where they were a year ago.”
All metro areas are now reporting at least four consecutive monthly declines.
Case/Shiller’s 10-city index fell even more sharply and finished down 9.8%.
The Case/Shiller indexes compare same-home sale prices. The industry considers them to be among the most accurate snapshots of housing prices.
Of the 20 metro areas examined, all but three posted declines for the year. Miami homes lost 17.5% in value – more than any other metro area – and Las Vegas and Phoenix both had 15.3% declines.
The three that posted modest gains: Charlotte, N.C., 2.3%; Portland, Ore., 1.2%; and Seattle, at 0.5%.
Los Angeles, the nation’s second biggest housing market, was the worst performer in December, when prices fell 3.6% compared with November; the decline for the year was 13.7%.
Other double-digit losers for the year were San Francisco, down 10.8%; Tampa, 13.3%; Detroit, 13.6%; and San Diego, 15.0%. Losses in the nation’s biggest market, New York, were more modest, down just 5.6% for the year.
Feb
26
January Foreclosures up 57%
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Filings saw yet another big jump last month, compared to levels a year ago; 45,327 homes were lost to bank repossessions.
NEW YORK (CNNMoney.com) — Foreclosure filings nationwide soared 57% in January over the same month last year – another indication that the nation’s housing woes are deepening.
A study released Tuesday by RealtyTrac, an online marketer of foreclosure properties, showed that 233,001 homes were affected, 8% more than in December. Of that total, 45,327 homes were lost to bank repossessions.
The only good news was the comparatively modest month-to-month increase in total filings.
“It could be that some of the efforts on the part of lenders and the government – both at the state and federal level – are beginning to take effect,” said James Saccacio, RealtyTrac’s chief executive.
“The big question is whether those efforts are truly helping homeowners avoid foreclosure in the long term, or if they are just forestalling the inevitable for many beleaguered borrowers,” he said.
Many mortgage-assistance efforts simply give borrowers a chance to pay off missed payments, rather than lowering monthly payments, which effectively just delays foreclosures. But now lenders claim they are restructuring more mortgages by lowering or freezing interest rates and reducing balances. These solutions are much more likely to help people save their homes.
Nevada, California and Florida had the highest foreclosure rates in the nation. During the housing boom, all three states recorded big price run-ups, and saw a large proportion of homes sold to investors. In Nevada, one of every 167 homes was in some foreclosure stage last month.
California had the largest total number of foreclosures among the states. There were more than 57,000 foreclosure filings there in January, one for every 227 homes. Florida trailed well back in total foreclosures with 30,000, but its rate of one for every 273 households was only slightly behind its West Coast rival.
Several states recorded massive jumps in foreclosure activity in the last twelve months. In Rhode Island filings rose 279%; in Maryland they spiked 430%; and in Virginia they leapt 634%.
Las Vegas tops foreclosure list
All three of those states had fairly modest rates to begin with. In Virginia, for example, even with that whopping increase, the rate, overall, was one in every 617 homes, about a quarter the rate in Nevada.
Eighteen states substantially improved since last January. In Pennsylvania, foreclosure filings fell 55% to just 1,683, one for every 3,226 households. West Virginia recorded a drop of 54% to a miniscule 53, one for every 16,667 households. And Vermont’s total dropped in half, from two to one.
Foreclosure and lending laws vary greatly from state to state, and that can have a huge impact on foreclosure rates. But most places have been recording ever-higher foreclosure numbers as home prices stagnated, and the effects of many of the non-traditional mortgages issued during the boom years took hold.
Subprime, hybrid adjustable rate mortgages, with interest rates that reset to much higher, often unaffordable levels after a two or three year period of low rates, caused many borrowers to default.
Even more exotic products, such as interest-only loans, where balances don’t shrink, or, worse yet, option ARMs, where balances grow, also contributed to foreclosure problems.
Those products have just about disappeared from the marketplace today and that should, eventually, lead to healthier foreclosure statistics in the future. But, before that happens, real estate markets will have to improve and, according to many experts, that’s not likely to happen much before the end of 2009.
Merrill Lynch, for example, is forecasting home prices will fall by 15% in 2008 and another 10% in 2009. That will likely continue to fuel high foreclosure rates.
Feb
25
NAR: Existing Home Sales Decline
WASHINGTON (AP) — Sales of existing homes fell for the sixth straight month in January, dropping to the slowest sales pace on record. Median home prices were also down and many analysts predicted further price declines in the months ahead given high levels of unsold homes.
The National Association of Realtors said Monday that sales of single-family homes and condominiums dropped by 0.4 percent last month to a seasonally adjusted annual rate of 4.89 million units. That was the slowest sales pace, going back to 1999, and was seen as evidence that the steepest slump in housing in a quarter-century has yet to hit bottom.
The median price of a home sold in January slid to $201,100, a drop of 4.6 percent from a year ago. Particularly alarming, analysts said, was the fact that the inventory of unsold homes jumped to a 10.3 months’ supply, meaning it would take that long to sell the 4.19 million homes on the market at the January sales pace.
That was up from 9.7 months in December and just below a two-decade high of 10.5 months hit in October. During the peak of the housing boom in 2005, the supply of homes relative to sales stood at 4.5 months.
“With sales weak and inventories at extraordinarily high levels, prices are likely to fall a lot more,” said Joel Naroff, chief economist at Naroff Economic Advisors. “Eventually, sellers will end their denial and realize that if they want to unload their homes, they will have to cut prices even more.”
Analysts said one of the problems was a rising tide of mortgage foreclosures, which is pushing even more unsold homes back on the already glutted market.
Wall Street put aside worries about the weak housing market to stage a strong rally on Monday based on encouraging signs that troubled bond insurers will successfully emerge from the credit market crisis. The Dow Jones industrial average surged by 189.20 points to close at 12,570.22.
Sales of existing homes fell by 12.7 percent in 2007, the biggest decline in 25 years, and are down 20 percent from their all-time high set in 2005, the final year of a five-year housing boom that saw sales and prices soar to record levels. Over the past two years, housing has been in a steep downturn made worse by a severe credit crunch as financial institutions tightened their lending standards in reaction to their multibillion-dollar losses on mortgages that have gone into default.
“With prices expected to continue dropping and banks leery to make loans, few prospective homeowners feel now is the time to buy,” said Michael Gregory, an economist at BMO Capital Markets.
Some analysts saw it as an encouraging sign that sales of single-family homes actually posted a modest increase, but the overall number was dragged down by a continued sharp decline in sales of condominiums.
Patrick Newport, an economist at Global Insight, said condo prices rose more sharply than single-family home prices from 2000 to 2006 but have fallen less in the current downturn. He said buyers are likely to remain leery until condo prices drop more.
Sen. Charles Schumer, D-N.Y., said the further bad news on existing home sales should be a wake-up call to Congress and the administration that more needs to be done to help the distressed housing market.
“The housing crisis has mushroomed in part due to Washington’s inaction,” he said. “Declining home values cut to the very heart of families’ sense of financial security and our economy’s overall health.”
Sales were weak in all parts of the country in January except the Midwest, where sales posted an increase of 3.4 percent. Sales dropped by 3.6 percent in the Northeast, 2.1 percent in the West and 0.5 percent in the South.
Lawrence Yun, chief economist for the Realtors, said he believed the housing market may be on the verge of bottoming out, with a rebound expected to start toward the end of this year. He said he expected demand to be bolstered in coming months by the housing sections of the $168 billion economic stimulus bill passed earlier this month. Those provisions raise the caps on the size of loans that can be backed by Fannie Mae and Freddie Mac and the Federal Housing Administration, an increase expected to provide help in high-cost areas of the country such as California.
But other economists said they still did not see a significant turnaround in housing until late this year or possibly early 2009.
“Expect sales and prices to keep falling,” said Ian Shepherdson, chief U.S. economist for High Frequency Economics. “There is no end in sight for the housing disaster.”
The severe slide in housing has depressed overall economic growth and raised concerns the economy could slip into a full-blown recession. The National Association for Business Economics said Monday that 45 percent of the members of its forecasting panel believe the economy will experience a recession before the end of this year and even those not looking for a downturn believe growth will slow significantly.
Feb
20
It turns out that massive interest rate spikes aren’t the problem — many borrowers couldn’t afford these mortgages even at the low, introductory interest rates.
NEW YORK (CNNMoney.com) — For months, we’ve fretted about the Armageddon that will hit when subprime adjustable rate mortgages start resetting to much higher interest rates.
What’s happening is even worse: Many of these loans are defaulting well before their rates increase.
Defaults for subprime loans issued in 2007 – none of which have reset yet – hit 11.2 percent in November. That represents perhaps 300,000 households, and is twice the default rate that 2006 loans had 10 months after being issued, according to Friedman, Billings Ramsey analyst Michael Youngblood.
Defaults are spiking well before resets come into play thanks to the lax lending environment of the past few years. Many borrowers were approved for mortgages that they had little chance of affording, even at the low-interest teaser rates .
“I was rather shocked by the characteristics of the 2007 loans,” said Youngblood.
Hybrid ARMs start with very affordable fixed-rate terms of two or three years. After that, rates can jump three percentage points or more, and then re-adjust even higher every six months to a year. On a $200,000 mortgage, a reset could add nearly $400 to the monthly mortgage payment.
Originally, concerns about these loans focused on the fact that that most homeowners wouldn’t survive such pricey resets. In late 2006, the Center for Responsible Lending (CRL), predicted that 2.2 million subprime ARM borrowers would lose their homes in the following two years due to reset shock.
But these mortgages were doomed from the start.
For instance, in both 2006 and 2007, well over 40 percent of subprime borrowers were awarded mortgages with either little or no documentation of their ability to pay. With these so-called “liar loans,” borrowers did not have to show proof of either earnings or assets.
And even when borrowers did go on the record about their earning power, it didn’t bode well. Both 2006 and 2007 saw a large proportion of loans with high debt-to-income ratios (DTI), which indicates the percentage of gross income required to pay debt. In 2007 subprime originations, the DTI hit 42.1 percent, up from 41.1 percent in 2006. Borrowers were simply taking on more debt that they could afford.
What’s more, many borrowers started out with low- or no-down payment loans, which left them with almost no equity in their home.
During the boom, rapid price appreciation meant borrowers built up home equity quickly. That minimized defaults, since owners could draw from that equity to pay their bills – including their mortgages – through home equity loans.
But prices fell starting in 2006,leaving borrowers with less home equity to draw upon when they run into financial problems.
Median home prices fell 5.8 percent nationally, and by double digits in many areas. That, along with the deterioration in underwriting, changed the default math.
Owners with mortgages worth more than their homes simply began walking away from their homes when costs become unmanageable.
Lenders were slow to react
By late 2006, lenders knew that the housing market was heading south. Foreclosure filings took off during the third quarter that year, up 43 percent from 12 months earlier, according to RealtyTrac, the online marketer of foreclosure properties. And home prices began to drop.
But instead of cutting back on risky loans, lenders kept lending. Why?
“Because investors continued to buy the loans,” said Doug Duncan, chief economist of the Mortgage Bankers Association.
Despite their quality, subprime mortgages were as profitable as any other for lenders like Countrywide (CFC, Fortune 500) and Wells Fargo (WFC, Fortune 500), who were able to quickly securitize the loans and sell them in the secondary market. The loans sold easily because they carried the promise of high yields.
“As long as you could sell the loan, you made the deal,” Duncan said.
Lenders needed the fees that these loans generated because their finances were weakening. Their cost of borrowing money was rising, while competitive pressures were keeping mortgage interest rates low.
“By 2006 many lenders were running into red ink,” said Youngblood.
So, they revved up lending to increase short-term profits. And, to outside analysts, there appeared to be nothing wrong with loan quality.
“There were very few overt changes in industry underwriting guidelines,” said Youngblood. What did change, he said, was that lenders made more exceptions to their standard practices, approving people with poor work histories or insufficient proof of income.
“These exceptions generally amounted to no more than 5 percent [of subprime loans] before 2006,” said Youngblood, “but they represented the majority of these loans issued in 2006 and 2007.”
The reason for that shift: Lenders depended on independent mortgage brokers for much of their business, and brokers pushed them to approve subprime loans because they delivered big profits for the brokers.
“Lenders felt they had to take the loans to preserve their access [to the rest of the loan pool],” he said. They accepted some risky subprime loans so that the brokers would also send them safer prime and Alt-A loans.
Of course that’s a bet that went bad. And it’s likely to get worse as resets for ARMs issued in 2006 and 2007 kick in this year.
Feb
12
Potential flag signaling turn around?
Homeowners behind in payments will get 30 days to work out problems; program expected to be unveiled Tuesday.
WASHINGTON (AP) — With mortgage defaults surging and politicians urging the industry to do more, six lenders agreed to widen their effort to help borrowers of all loans – not just subprime.
The plan, called Project Lifeline, is to be announced Tuesday by the Treasury Department and the Department of Housing and Urban Development, a person familiar with the plan said Monday evening, confirming earlier news reports and speaking on condition of anonymity because it had not yet been made public.
The plan will allow seriously overdue homeowners to suspend foreclosures for 30 days while lenders try to work out more affordable loans are worked out.
On a pilot basis, the plan will involve six of the largest mortgage lenders, in hopes that more lenders will sign on. The participants are Bank of America Corp. (BAC, Fortune 500), Citigroup Inc. (C, Fortune 500), Countrywide Financial Corp. (CFC, Fortune 500), JPMorgan Chase & Co. (JPM, Fortune 500), Washington Mutual Inc. (WM, Fortune 500) and Wells Fargo & Co. (WFC, Fortune 500)
All six are involved in Hope Now, a Bush administration organized effort to freeze rates on some high-cost subprime mortgages for five years to aid borrowers whose teaser rates are jumping sharply higher. Since then, Treasury Secretary Henry Paulson has urged lenders to expand that effort to cover struggling homeowners with conventional mortgages.
The new plan applies to seriously delinquent homeowners, those whose mortgages are 90 days or more past due.
The Hope Now alliance, which includes lenders, investors and nonprofit groups, said last week that it helped nearly 8% of subprime borrowers in the second half of 2007 – more than its original estimate.
The group said it helped 545,000 subprime borrowers with spotty credit in the second half of last year, compared with its January estimate of 370,000. That works out to 7.7% of 7.1 million subprime loans outstanding as of September 2007.
Among the subprime borrowers aided, 150,000 were helped through permanent-loan modifications, such as lower interest rates, while 395,000 negotiated repayment plans, which often involve a borrower getting back on track even after missing a few payments.
Consumer groups, however, point out that many borrowers still can’t keep up, even after loan workouts. They say many of the borrowers in the Hope Now effort have negotiated short-term loan modifications or repayment plans, which often involve a borrower getting back on track after missing a few payments. A full-fledged refinancing at a lower rate is preferable, they say.